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Broadmark Realty Capital Inc.

Table of Contents

Broadmark Realty Capital Inc.

As used in this Quarterly Report on Form 10-Q, the terms “Broadmark Realty,” “the Company,” “we,” “us” and “our” refer to Broadmark Realty Capital Inc., unless the context indicates otherwise.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations of future operations, are forward-looking statements. Forward-looking statements reflect the Company’s current views with respect to, among other things, capital resources, portfolio performance and projected results of operations. Likewise, the Company’s statements regarding anticipated growth in its operations, anticipated market conditions, demographics and results of operations are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of terminology such as “outlook,” “believes,” “expects,” “projects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words or phrases.

The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that it has anticipated. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause the Company’s actual results to differ include, but are not limited to:

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Unaudited Broadmark Realty Capital Inc.

Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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Broadmark Realty Capital Inc.

Condensed Consolidated Balance Sheets

(Dollar amounts in thousands, except share amounts)data, unaudited)

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See accompanying notes to unauditedthe condensed consolidated financial statements

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Unaudited Condensed Consolidated Statements of Income

(Dollar amounts in thousands, except share and per share amounts)data, unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

Note 1 - Organization and business

Broadmark Realty Capital Inc. (“Broadmark Realty,” “Company”, or “Successor”“the Company,” “we,” “us” and “our”) is an internally managed commercial real estate finance company that offers short-term, first deed of trust loans,provides secured byfinancing to real estate to fund the constructioninvestors and development of, or investment in, residential or commercial properties.developers. Broadmark Realty’s objective is to preserve and protect shareholder capital while producing attractive risk-adjusted returns primarily through dividends generated from current income from its loan portfolio. Broadmark Realty operates in select states that it believes to have favorable demographic trends and those which provide a more efficient and quickerBroadmark Realty the ability to efficiently access tothe underlying collateral in the event of borrower default.

On November 14, 2019 (the “Closing Date”), Broadmark Realty Capital Inc., a Maryland corporation (formerly named Trinity Sub Inc.) (“Broadmark Realty”), consummated a business combination (the “Business Combination”) pursuant to an Agreement and Plan of Merger, dated August 9, 2019 (the “Merger Agreement”), by and among the Company, Trinity, Trinity Merger Sub I, Inc. (“Merger Sub I”), Trinity Merger Sub II, LLC (“Merger Sub II” and together with Trinity and Merger Sub I, the “Trinity Parties”), PBRELF I, LLC (“PBRELF”), BRELF II, LLC (“BRELF II”), BRELF III, LLC (“BRELF III”), BRELF IV, LLC (“BRELF IV”) and, together with PBRELF, BRELF II and BRELF III, the “Predecessor Companies” and each a “Predecessor Company”), Pyatt Broadmark Management, LLC (“MgCo I”), Broadmark Real Estate Management II, LLC (“MgCo II”), Broadmark Real Estate Management III, LLC (“MgCo III”), and Broadmark Real Estate Management IV, LLC (“MgCo IV” and, together with MgCo I, MgCo II and MgCo III, the “Predecessor Management Companies” and each a “Predecessor Management Company,” and the Predecessor Management Companies, together with the Predecessor Companies and their subsidiaries, the “Predecessor Company Group”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub I merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Trinity Merger”), (ii) immediately following the Trinity Merger, each of the Predecessor Companies merged with and into Merger Sub II, with Merger Sub II being the surviving entity of such merger (the “Company Merger”), and (iii) immediately following the Company Merger, each of the Predecessor Management Companies merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Management Company Merger” and, together with the Trinity Merger and the Company Merger, the “Mergers”). As a result of the Mergers, Merger Sub II and Trinity became wholly owned subsidiaries of Broadmark Realty.

The consolidated subsidiaries of Broadmark Realty after the Business Combination include BRMK Lending, LLC, BRMK Management, Corp., and Broadmark Private REIT Management, LLC. BRMK Lending, LLC originates short-term first position loans secured by deedsfirst deed of trust liens on residential and commercial real estate. BRMK Management, Corp. (“Manager”(the “Manager”) manages the underwriting, closing, servicing and disposition of mortgage notes, and performs all general and administrative duties.duties for Broadmark Realty. Broadmark Private REIT Management, LLC (“Private(the “Private REIT Manager”) was designed to manage the newly organizedmanages Broadmark Private REIT, LLC (“Private(the “Private REIT”), an unconsolidated affiliate of the Company that primarily participates in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty.

Broadmark Realty intends to electhas elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with the tax period ending December 31, 2019.purposes. Broadmark Realty generally will not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. The Company also operates its business in a manner that permits it to maintain an exclusion from registration under the Investment Company Act of 1940. As a REIT, Broadmark Realty may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”), which may earn income that would not be qualifying income if earned directly by a REIT. Broadmark Realty has two TRSs beingThe Manager is a TRS and this election applies to the wholly-owned subsidiaries of the Manager, andincluding the Private Manager, respectively. 

Unless the context otherwise requires, references to “Broadmark Realty”, the “Company”, “we”, “us” and “our” in the remainder of this report refer to Broadmark Realty and its consolidated subsidiaries after the Business Combination and refer to the Predecessor Company Group for periods prior to the Business Combination.

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The presentation of the Predecessor period has been conformedBroadmark Realty Capital Inc.

Notes to the current period's presentation for the purposes of these consolidated financial statements.Condensed Consolidated Financial Statements

Principles of Consolidation

For Predecessor period, all intra-entity accounts, balances and transactions have been eliminated in the preparation of the unaudited condensed consolidated financial statements. Beginning November 15, 2019, all significant intercompany accounts, balances and transactions have been eliminated in consolidation. Broadmark Realty consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well as those entities deemed to be variable interest entities (“VIEs”), if any, in which Broadmark Realty is determined to be the primary beneficiary. As of March 31, 2020, Broadmark Realty is not the primary beneficiary of, and therefore does not consolidate, any VIEs.

RisksThe Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary acting as manager with no significant equity investment, do not hold a controlling interest in and Uncertainties

Indo not consolidate. Furthermore, the normal coursePrivate REIT participation in loans originated by us meets the characteristics of business, the Company encounters one primary typea participating interest in accordance with GAAP and therefore, is treated as a sale of economic risk in the form of credit risk. Credit risk is the risk of default on the Company's investment in mortgage notes receivable resultingand is derecognized from our consolidated financial statements.

Reclassifications

Certain amounts in our prior period condensed consolidated financial statements have been reclassified to conform to the presentation of our current period condensed consolidated financial statements. These reclassifications had no effect on our previously reported net income or stockholders’ equity. The reclassification for the separate presentation of accretion of deferred origination and amendment fees resulted in a borrower’s inability or unwillingnessreclassification of net cash provided by operating activities to make contractually required payments.net cash provided by investing activities, both as previously reported. The Company believes thatreclassifications also included the carrying valuesseparate presentation of its investments reasonably consider this credit risk.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Reportable Segments

The Company operatesWe operate the business as one1 reportable segment.segment, which originates, underwrites and services construction loans.

BALANCE SHEET MEASUREMENT

Cash and Cash Equivalents

The Company considersWe consider all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. The Company hasWe have a cash management sweep account repurchase agreement whereby itsour bank nightly sweeps cash in excess of $750,000, sells the Companyus specific U.S. Government Agency securities and then repurchases themthese securities the next day.

The Company maintains itsWe maintain our cash and cash equivalents with financial institutions. At times, such amounts may exceed federallyinstitutions, which are insured limits. Asup to a maximum of $250,000 per account as of March 31, 20202021 and December 31, 2019,2020. The balances in these accounts may exceed the uninsured cash and cash equivalents balance was $256.9 million  and $236.7 million, respectively.insured limits. There were no0 restrictions on cash atas of March 31, 20202021 or December 31, 2019.2020.

Mortgage Notes Receivable

Mortgage notes receivable (referred to herein as “mortgage notes receivable”, “construction loans”, “loans”, or “notes”) are classified as held for investment as the Company haswe have the intent and ability to hold until maturity or payoff and are carried in the condensed consolidated balance sheets at amortized cost, net of construction holdbacks, interest reserves, allowance for loancredit losses interest reserve, construction holdbacks and deferred origination and extensionamendment fees. Mortgage

Participations in mortgage notes receivable thatreceivables are in default areaccounted for as sales and derecognized from the balance sheet when control over the transferred assets has been surrendered. Control over transferred assets is deemed to be impaired. Allsurrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right, beyond a more than trivial benefit) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. If the sales do not meet these criteria, the sale of the Company's loansparticipation is treated as a secured borrowing. As of March 31, 2021, all participations in mortgage notes receivable sold to the Private REIT have achieved sale accounting.

Current Expected Credit Losses Allowance

In the fourth quarter of 2020, we adopted the current expected credit loss (“CECL Standard”) for the full year ended December 31, 2020 as we ceased to qualify as an emerging growth company effective December 31, 2020. As a result, we were no longer permitted an extended transition period for complying with new or revised accounting standards affecting public companies. The initial CECL allowance adjustment of $2.0 million was recorded on January 1, 2020 as a cumulative-effect of change in accounting principle through a direct charge to accumulated deficit on our condensed consolidated statements of stockholders’ equity; however subsequent changes to the CECL allowance are consideredrecognized through net income on our condensed consolidated statements of income. Our condensed consolidated statement of income for the three months ended March 31, 2020 includes an additional provision for credit losses of $0.8 million associated with the adoption of the CECL Standard, as a result, our previously reported net income of $27.3 million for this period is lower by $0.8 million.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

The CECL Standard replaced the incurred loss model under existing guidance with an expected loss model for instruments measured at amortized cost. We now record an allowance for credit losses in accordance with the CECL Standard on our loan portfolio, including unfunded construction holdbacks, on a collective basis by assets with similar risk characteristics. In addition, for assets that are classified as collateral dependent and therefore, impaired loans are evaluated for impairmentbased on foreclosure being probable, we continue to record loan specific allowances based on the fair value of the collateral less costsfor expected credit losses under the CECL Standard. Given the short-term nature of our loans, we evaluate the most recent external appraisal and depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to sell.estimate the fair value of the collateral for such loans. 

The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a probability of default/loss given default (“PD/LGD”) method approach for estimating current expected credit losses.

In accordance with the PD/LGD method, an annual historical loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The PD/LGD method requires consideration of the timing of expected future funding of existing commitments and repayments over each asset’s remaining life. An annual loss factor, adjusted for macroeconomic estimates, is applied over each subsequent period and aggregated to arrive at the CECL allowance.

In determining the CECL allowance, we considered various factors including (i) historical loss experience in our portfolio, (ii) historical loss experience in the commercial real estate lending market, (iii) timing of expected pay offs including prepayments and extensions where reasonably expected, and (iv) our current and future view of the macroeconomic environment. We utilize a reasonable and supportable forecast period equal to the contractual term of the loan plus short-term extensions of one to three months that are reasonably expected for construction loans.

Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. Refer to “Note 3 – Mortgage Notes Receivable” for further information regarding the CECL allowance.The CECL Allowance related to the principal outstanding is presented within mortgage notes receivable, net and for unfunded commitments is within accounts payable and accrued liabilities on our condensed consolidated balance sheets.

We have made an accounting policy election to exclude accrued interest receivable, included in interest and fees receivable, net on our consolidated balance sheets, from the amortized cost basis of the related mortgage notes receivable in determining the CECL allowance as any uncollected accrued interest receivable is written off in a timely manner. No interest income is recognized on mortgage notes receivable that are in contractual default unless the interest is paid in cash or collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Deferred Income

Deferred income represents the amount of the Company'sour origination and amendment or extension fees that have been deferred and will be recognized in income over the contractual maturity of the underlying loan.

Participation Origination fees are included in the total commitment to the borrower and financed at the time of loan origination. Amendment fees are either included in the total commitment to the borrower and financed at the time of the loan amendment or are billed to the borrower when the loan is amended and not capitalized into the principal outstanding. Deferred origination and amendment fees capitalized into the principal outstanding are included within mortgage notes receivable, net on the consolidated balance sheets. Deferred amendment fees that are not included in the principal outstanding are presented within interest and fees receivable, net on the condensed consolidated balance sheets. 

Interest and Fees Receivable

Interest on performing loans is evaluated for achievementaccrued and recognized as interest income at the contractual rate of interest, or at the contractual rate of monthly minimum interest. Extension fees are charged when we agree to extend the maturity dates of loans. In addition, late fees are changed when borrower payments are contractually past due. We monitor each note’s outstanding interest and fee receivables and, based on historical performance, generally reserve against the balance after a receivable is greater than 60 days past due unless collectability of all amounts due is reasonably assured.

We have made an accounting policy election to exclude accrued interest and fee receivables from the amortized cost basis of the characteristics of participating interest per ASC 860 Transfers and Servicing.  If the sale of a participation has all of the characteristics of a participating interest, it achieves sale accounting and therelated mortgage notes receivable in determining the CECL allowance as any uncollected accrued interest receivable is presented net of the participating interest.  If the sale ofwritten off in a participation does not have all of the characteristics of a participating interest, it does not achieve sale accounting and is treated as a secured borrowing.  As of March 31, 2020, all participation in mortgage notes receivable purchased by the Private REIT have achieved sale accounting and have been derecognized from the unaudited condensed consolidated balance sheet.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Our lease term is through January 2032, which includes an option to extend the lease term for an additional five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of the existing lease if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise the option to extend the lease. Examples of such events or changes include construction of significant leasehold improvements or other modifications or customizations to the underlying asset, relevant business decisions or subleases. We have concluded that the renewal option is not reasonably certain of being exercised, therefore, the renewal is not included in the right of use asset and lease liability.

As our lease did not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

We recognize lease expense for our operating lease on a straight-line basis over the lease term. Variable lease payments are generally recognized when incurred. These expenses are included in general and administrative expenses in the consolidated statements of income.

Goodwill

Goodwill represents the excess of the consideration paidcost of an acquired business over the fair value of netthe assets acquired in connection withat the Business Combination in November 2019. Goodwilldate of acquisition and is not amortized, but rather tested foramortized. We assess the impairment annuallyof goodwill on an annual basis, in our fourth quarter, or more frequently ifwhenever events or changes in circumstances indicate potential impairment.that goodwill may be impaired. In testingour evaluation of goodwill, for impairment, the Company follows ASC 350, Intangibles—Goodwill and Other, which permitswe typically first perform a qualitative assessment to determine whether the carrying value of whethereach reporting unit is greater than its fair value. If it is more likely than not that the faircarrying value of a reporting unit is lessgreater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value including goodwill. Ifof the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less thanover its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not thatfair value. We reevaluated the fair value of the reporting unit is less than its carrying value including goodwill,during our annual assessment in the fourth quarter of 2020 and the fair value of thatthe reporting units is compared with its carrying value, including goodwill. Ifunit exceeded the carrying value and there was 0 goodwill impairment. During the first quarter of 2021, we continued to monitor the impact of COVID-19 and determined there were no new triggering events to warrant a reporting unit exceeds its fair value, goodwill is considered impaired withquantitative assessment of our goodwill.

In the impairment loss equalfirst quarter of 2020, we recorded a measurement period adjustment to reduce the amount by which the carrying value of the goodwill exceeds the impliedpreliminary fair value of that goodwill.intangible assets in the form of customer relationships by $5.0 million and increased our preliminary value of goodwill by $5.0 million. As a result of this adjustment to preliminary values, $0.9 million of amortization of intangible assets recorded in 2019 was reversed in the first quarter of 2020.

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Other Assets

Other assets primarily consist of fixed assets, deferred financing costs, intangible assets, prepaid insurance and other operating receivables.

Fixed Assets

Fixed assets, which are included in other assets in the accompanying condensed consolidated balance sheets are stated at cost, less accumulated depreciation. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. Depreciation is recorded on the straight-line basis over the estimated useful life of the assets. For computer equipment, office equipment, furniture and fixtures the useful lives range from three to seven years. For leasehold improvements, we depreciate over the shorter of expected useful life or lease term.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Deferred Financing Costs

Deferred financing costs represent direct costs associated with the execution of the revolving credit facility. As the revolving credit facility has no principal outstanding and there is no recognized debt liability, the deferred financing costs are included in other assets on the condensed consolidated balance sheet. These costs are amortized on the straight-line basis over the initial term of our credit facility.

Intangible Assets

As a result of the Business Combination in November 2019, the Company identified intangible assets in the form of customer relationships. The Company recordedWe record the intangible assets at fair value at the acquisition date and isare amortizing the value of finite livedthese finite-lived intangibles into expense over the expected useful life. The Company’sAll of our intangible assets have estimated useful lives of three years.

Fixed Assets

Fixed assets, which are included in other assets inrelate to the accompanying unaudited condensed consolidated balance sheets are stated at cost, less accumulated depreciation. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. Depreciation is recorded on the straight-line basis over the estimated useful life of the assets, which ranges from three to seven years.

Leases

In connection with the Business Combination, the Company entered into an arrangement to sublease an operating lease and, based on the guidance in ASC Topic 842, recorded a right-of-use asset and a lease liability in the amount of $0.4 million, representing the present value of the remaining payments under the lease discounted based on the Company’s incremental borrowing rate ascustomer relationships. As of November 14, 2019. The amount is not significant to the consolidated balance sheets.

Impairment of Loans

The Company designates loans as non-performing at such time as (i) the borrower fails to make the required monthly interest-only loan payments; (ii) the loan has a maturity default; or (iii) in the opinion of management, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan. Loans are charged off to the allowance for loan losses when the contractual amount is no longer realizable.

The allowance for loan losses reflects management’s estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased or decreased by recording the loan loss provision or recovery in the Company’s consolidated statements of income and is decreased by charge-offs when losses are confirmed through the receipt of assets, such as in a pre-foreclosure sale or upon ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The allowance for loan losses is determined on an asset-specific basis.

The asset-specific allowance relates to estimated losses on individual impaired loans. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. This assessment is made on a monthly basis on factors such as payment status, lien position, borrower financial resources and investment collateral, collateral type, project economics and geographical location as well as national and regional economic factors. An allowance is established for an impaired loan when the estimated fair value of the collateral is lower than the carrying value of that loan.

For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell in comparison to the carrying value. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. Given the short term nature of its loans, the Company evaluates the most recent external “as is” appraisal and depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to estimate the fair value of the collateral for such loans.  As of March 31, 2020, all of the Company's allowance for loan losses represents an asset-specific allowance.

EXPENSE RECOGNITION

Operating Expenses

Operating expenses are accrued as the expenses are incurred. General and administrative expenses primarily consist of legal, audit, insurance, excise taxes and amortization of intangible assets. For the three months ended March 31, 2019,  commissions paid to a related party of $1.3 million are included in general and administrative expenses.

Share‑Based Payments

The Company follows the accounting guidance for share-based payments which requires the measurement and recognition ofWe measure compensation expense for all stock-basedshare-based awards madeat fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest, which is generally three years for employees and non-employeeone year for directors. AwardsShare-based awards are issued under the Broadmark Realty Capital Inc. 2019 Stock Incentive Plan.